Telus Corp (TU) 2012 Q2 法說會逐字稿

Good morning ladies and gentlemen, and welcome to the TELUS 2012 Q2 earnings conference call.

I would like to introduce your speaker, Mr. John Wheeler.

Please go ahead.

Welcome and thank you for joining us today for our second quarter 2012 investor conference call.

The call is scheduled for up to one hour.

The news release for our second-quarter financial and operating results and detailed supplemental investor information are posted on our website, TELUS.com/investors.

For those with Internet access, the quarterly presentation slides are also available on our website.

You will be in listen-only mode during the opening comments.

Let me now direct your attention to slide 2.

The forward-looking nature of this presentation and answers to questions and statements about future events are subject to risks and uncertainties and assumptions.

Accordingly, actual performance could differ materially from statements made today, so do not place undue reliance on them.

We also disclaim any obligation to update forward-looking statements except as required by law.

I ask that you read our legal disclaimers and refer you to the risks and assumptions outlined in our public disclosures and filings with the securities commissions in Canada and the United States.

Turning to slide 3 for an outline of today's agenda, we will start with a brief opening comment by President and CEO Darren Entwistle, followed by a review of the second quarter by Executive Vice President and CFO Bob McFarlane.

Joe Natale, our Chief Commercial Officer, will comment on several key operating highlights.

We will then conclude with a question and answer session.

Let me now turn the call over to Darren.

Thanks, John.

Good morning, everyone.

TELUS's strong financial performance and operating metrics this past quarter are the direct result of our investments in our broadband network technology, and as well our team's commitment to delivering a superior customer experience.

Indeed, TELUS continues to build upon our Company's operational momentum, making significant investments in our LTE wireless network, our broadband wireline access network, and as well building two new intelligent Internet data centers to support attractive growth opportunities in cloud-computing.

Based on our first-half results and positive outlook for the remainder of the year, I am pleased that we're able to increase the full year 2012 consolidated guidance range for revenue and EBITDA driven by our excellent wireless results.

These upward guidance changes are accompanied by a 5% increase in our outlook for capital investments, supporting growth in our broadband data networks.

Notably, we continue to expect strong double-digit free cash flow growth of 20% to 35% this year, as shown in the appendix to the presentation.

This underpins our multiyear 10% dividend growth model which I look forward to updating you on at our next investor call in November.

Let me now turn the meeting over to Bob and Joe to take you through our key operating metrics.

Thanks, Darren, and good morning everyone.

Let's start our review of the second quarter beginning with wireless on slide 4. Total wireless revenue increased by just over 7%, reflecting strong network revenue growth of 7.6%, driven by both continued ARPU and subscriber growth.

Data revenue increased by 27% while voice revenue showed a much improved trend, declining only 1.9% over the same period a year ago.

Wireless EBITDA was higher by 13% year-over-year, while EBITDA margins on total revenue increased yet again this quarter by 2.1 points to 44.2%, or nearly 48% of network revenue.

Capital expenditures increased to CAD194 million due to the buildout of our urban 4G LTE network to support continued growth.

Simple cash flow declined slightly due to the higher capital expenditures.

Turning to slide 5, TELUS added 112,000 postpaid net adds in the second quarter, an increase of 22% year-over-year.

Notably, TELUS's smartphone base increased to 59% of our postpaid subscriber base.

It reflects a significant 17-point increase from 42% last year.

Once again our postpaid net adds were partially offset by the ongoing decline of lower ARPU prepaid subs, down by about 26,000.

Consequently, the higher-value postpaid mix of the total subscriber base increased to 85% while total net adds were 86,000.

So, another very good quarter for wireless subscriber results.

Slide 6 shows the strong metrics related to our wireless marketing and loyalty efforts in the quarter.

Gross adds of 394,000 decreased by 12% as our strong churn result allowed us not to be overly reactive to promotional offers by competitors in the quarter.

Blended churn of 1.39% this quarter was an improvement of 28 basis points year-over-year to the best level in over five years.

This reflects strong ongoing retention efforts, lower government of Canada contract deactivations, an increasing proportion of subscribers that are postpaid, and continued success from our Corporate priority of putting customers first.

Notably, postpaid churn of 1% improved by 34 basis points over last year.

Cost of acquisition per gross add increased by 9% to CAD404 due to lower gross additions, higher per-unit subsidies from the higher mix of smartphone sales, and price competition driving deeper smartphone subsidies.

Retention expense declined by approximately 4% due to lower pension volumes resulting from strong retention efforts over the past year as postpaid clients took advantage of our Clear and Simple Device Upgrade program, and to a lesser extent, commission savings from recent dealer acquisitions.

This was a very good result considering higher-cost smartphones represented 85% of postpaid retention loading.

The combination of ARPU growth and improved churn has led to a remarkable 23% increase in lifetime revenue to more than CAD4300.

As such, the COA to lifetime revenue ratio improved to less than 10%.

Meanwhile, retention cost to network revenue ratio also improved, down 1.2 points to 10.7% despite the pressures associated with higher subsidy smartphone low end.

These strong results enabled TELUS to improve EBITDA margins.

Slide 7 shows the breakdown of TELUS's total ARPU between voice and data.

Wireless ARPU increased by 2.4% and represents the seventh consecutive quarter of year-over-year ARPU growth.

In addition, this growth increased sequentially for the second straight quarter.

This increase in overall wireless ARPU is driven by an increase in postpaid ARPU as well as the higher mix of postpaid subscribers.

Data ARPU growth was 21% year-over-year, greatly exceeding the voice ARPU decline of 6.7%, which moderated from annualized declines of approximately 10% in the previous four quarters.

Turning to slide 8, the combined impact of our excellent data ARPU growth plus a 5% increase in our subscriber base resulted in wireless data revenue increasing by 27% year-over-year to CAD512 million.

This growth was driven by strong smartphone service revenues, including increased text messaging due to the higher penetration of smartphones and associated adoption of data plans.

More devices that provide an Internet connection, including tablets, increased rates for pay-per-use text messaging and higher data roaming volumes.

Data now represents 39% of network revenue compared to 33% only a year ago.

Turning to slide 9, let's review our wireline segment results.

Revenue increased by over 1% due to data revenue growth of 8.5%, reflecting strong TV and high-speed Internet subscriber growth which offset ongoing declines in traditional, voice, local and long-distance revenues which were down 7% and 11% respectively.

Included in other operating income is a CAD9 million gain related to recording 50% of the gain on contributing land to the residential TELUS Garden real estate project, as well as CAD1 million of equity losses on our share of the TELUS Garden project.

Wireline EBITDA declined by 6% due to increased contribution from the declining higher-margin legacy voice services, as well as some notable one-time expense impacts on a year-over-year basis.

In Q2 2012 there was a lower defined benefit pension expense recovery, a one-time benefit recovery in 2011, and also a net nonrecurring share-based compensation expense recovery in 2011 related to net cash settlement of stock options.

These negative effects were partly offset by Hong Kong growth in Optik TV and other services and equipment sales.

When adjusting for these expenses, which aggregate to about CAD10 million, they -- and offset the TELUS Garden related positive impacts on a year-over-year basis.

Reported EBITDA margins declined by about 2 points to 28%.

Clearly we're focused on improving this result, including continuing with our long-standing disciplined approach to making the necessary investments to improve operating efficiency, particularly in the legacy areas of our business.

This was reflected in our May announcement to double our estimate of 2012 restructuring expenses to CAD50 million.

Year to date, wireline capital expenditures are lower by nearly 6%, while for Q2 wireline CapEx remained stable at about CAD350 million, as reduced investments in legacy networks and our broadband build were offset by increased investments from two new Internet data centers under construction to enhance our national cloud computing service capabilities.

Slide 10 shows the results of our continued success at rolling out Optik TV.

We reported that another good quarter of TELUS TV net adds with 43,000 new customers, while TV base increased by 48% to reach just under 600,000 subscribers.

Overall, we continue to be pleased with the steady momentum in this business, including improved cost of acquisition, stable customer churn and great ARPU growth.

Turning to slide 11, we generated strong high-speed Internet loading of 20,000 for the quarter, reflecting an increase of 54%.

Our total high-speed Internet subscriber base is nearly up 7% or 81,000 over the last 12 months to reach 1.28 million.

Slide 12 shows our residential and business NAL performance for the quarter.

Residential NAL losses of 36,000 showed an improvement sequentially, but were lower year-over-year due to renewed price competition from our primary cable competitor.

Business NAL losses of 14,000 this quarter are largely due to the ongoing price-based competition in the small and medium business market, and continued conversion from legacy voice services to IP services.

The small gain in 2011 was due to the implementation of voice and data services for select wholesale customers in the first half of last year.

Altogether, TELUS's network access line count declined by 5.3% year over year.

Putting the two segments together, let's look at TELUS's consolidated results starting on slide 13.

Revenue in the second quarter increased by more than 4% over the same period a year ago, while reported EBITDA increased by 5%.

When adjusting for the pretax gain of equity losses for the TELUS Garden project, adjusted EBITDA increased by 4%, in line with revenues.

Reported earnings per share increased by 2% to CAD1.01.

I'll explain the underlying drivers in a moment.

Capital expenditures were higher by 20% primarily due to the increase in wireless, as discussed earlier.

Free cash flow before dividends was stable at CAD284 million as higher adjusted EBITDA and lower interest expense and income taxes paid were offset by higher capital expenditures.

Year-to-date free cash flow of CAD642 million is higher by 43% and we continue to expect double-digit growth this year.

Slide 14 provides a detailed breakdown of the EPS drivers this quarter.

Adjusted EPS increased by 6.3%, from CAD0.96 to CAD1.02, when excluding tax adjustments in both periods and the impact of the TELUS Garden in this quarter.

Starting with adjusted EPS of CAD0.96 in the second quarter last year, higher normalized EBITDA added about CAD0.10 of growth while lower financing costs due to lower interest rates added CAD0.02 to the upside.

These favorable trends were partially offset by higher depreciation and amortization expenses associated with a larger asset base as a result of recent CapEx and acquisitions totaling about CAD0.03, an increase in tax expense of CAD0.02, and a lower pension expense recovery that negatively impacted EPS by about CAD0.01.

To complete the picture, this quarter's reported EPS includes an after-tax gain net of equity losses related to the residential component of the TELUS Garden real estate project, equivalent to a favorable CAD0.02 per share.

Meanwhile, unfavorable income tax related adjustments, primarily reflecting adjustments arising from legislated income tax changes in the province of Ontario as we mentioned last quarter, negatively impacted reported EPS in this quarter by CAD0.03.

Let's turn to slide 15 to review the updated 2012 annual guidance announced today, based on a positive year to date results and our latest and generally favorable outlook for the balance of the year.

Reflecting our excellent wireless year to date results, we have increased our guidance for wireless EBITDA by CAD100 million on both the low and the high end of our original target range.

We now expect wireless EBITDA growth of 10% to 14% this year.

Turning to wireline, revenue has been increased by CAD50 million on both the low and high ends of the original range.

We now expect revenue growth of 1% to 4% driven by continued data revenue growth from growth services, including Optik TV and high-speed Internet.

The range for wireline EBITDA was narrowed, with the top end lowered by CAD50 million consistent with year-to-date results, higher restructuring costs related to efficiency initiatives, as well as other opportunities for improvement.

On to slide 16, we see the consolidated revenue has been increased by CAD50 million due to our higher outlook in wireline.

Consolidated EBITDA guidance has also been increased to reflect the changes made in both wireless and wireline.

We now expect EBITDA growth of 3% to 7%.

While EBITDA is expected to be higher, increased depreciation and amortization expense associated with higher CapEx and negative deferred income tax revaluation associated with the Ontario corporate income tax freeze leads to maintaining our overall EPS guidance as unchanged.

Our capital expenditure outlook has increased by CAD100 million to approximately CAD1.95 billion.

The higher CapEx reflects higher spending in growth areas including 4G LTE and our organic Internet data center investments where the center in Rimouski is expected to come online in the third quarter.

Let's change gears now and do a quick recap of some notable recent Corporate developments starting on slide 17.

In July, TELUS filed a response to the CRTC about the misleading allegations by Globalive concerning TELUS's foreign ownership levels.

Our response highlighted that TELUS's long-established systems to monitor and control foreign ownership of its voting shares have kept the Company compliant with Canada's foreign ownership restrictions for telecom companies.

We reported that at the end of June, 32.59% of TELUS's voting shares were held by non-Canadians, below the federal limit of 33.33%.

This includes the holdings of Mason Capital, which recently reported that it held a 19.98% ownership of TELUS's common shares.

Mason has recently made foreign ownership allegations public that are very similar to Globalive's in an attempt to frustrate TELUS's plans to consolidate its dual class share structure on a one-for-one basis.

Globalive and Mason both used reports from Broadridge Financial Solutions as the basis for their allegations.

These reports use geographical and mailing information that can result in shares being double counted.

Notably, the report showed 214 million voting shares when TELUS only has 175 million of such shares issued and outstanding.

Broadridge confirmed to TELUS that its reports did not accurately portray TELUS foreign ownership and should not be used for this purpose.

TELUS outlined to the CRTC its long-standing and robust processes to control foreign ownership levels.

These are administered through our third-party transfer agent, Computershare.

TELUS continues to be fully compliant with Canada's foreign ownership restrictions, and filed evidence to that effect with the CRTC.

We therefore asked the CRTC to dismiss Globalive's complaint.

As outlined on slide 18, on July 20 the CRTC released its decision on the final offer baseball-style arbitration between Bell Media and TELUS on the renewal of the agreement for the distribution of Bell Media specialty television services on Optik TV.

TELUS is pleased that the CRTC selected TELUS's final offer in the arbitration process, which means that consumers will continue to enjoy the choice provided by TELUS's more flexible theme pack model.

This means that TELUS will not need to move TSN to its basic or what we call our Essentials TV package.

Bell had been seeking a minimum penetration level for TSN was significantly exceeded the actual consumer take-up of the surface as part of Optik TV's best in class sports pack.

The CRTC chose our offer because it was, quote, creative and innovative, and because picking Bell's final offer would have, quote, reduced some of the innovative elements in TELUS's service offering that are currently available to TELUS subscribers, end quote.

Notable for investors is that the pricing negotiated ahead of the final offer arbitration was consistent with the accruals we had been booking.

The decision is a win for TELUS and consumer choice, and it serves to reinforce key attributes of the CRTC's vertical integration framework announced last year.

Let's now turn to slide 19 to recap second quarter highlights.

We're pleased with the overall results in the second quarter and first half of 2012.

We delivered robust revenue earnings growth generated by continued excellent wireless results.

Our top Corporate priority of putting the customer's first has led our Company to report the lowest blended churn rate in over five years, combined with ARPU growth of 2.4% which drove a significant expansion in EBITDA margin while postpaid subscriber adds increased year-over-year.

We continue to deliver good Optik TV and Internet subscriber growth which more than offset residential line losses.

These results indicate that our capital investment program, notably including our significant investments in construction of our new LT wireless network and Internet data centers to support attractive future organic growth opportunities in wireless and cloud computing, is the right strategy for TELUS.

Reflecting our latest and generally favorable outlook for the balance of the year, we are revising upwards our 2012 consolidated annual guidance.

Let me make one final comment before handing the call over to Joe.

With regards to the release by Mason Capital yesterday afternoon on requisitioning a shareholders' meeting within the next four months, investors should be aware of the following.

A binding vote on a resolution to amend our articles typically requires, consistent with the Company's May 2012 share conversion proposal that was withdrawn, the approval by two-thirds of the votes cast by the holders of both common and nonvoting shares, each voting separately as a class.

The nature of such thresholds was notably not mentioned in the Mason release.

We see this as another in a series of nuisance steps by Mason Capital to try to advance its discredited, empty voting strategy and generate short-term profit for themselves on the share class spread, which is at the expense of other shareholders and contrary to good corporate governance.

We will respond to their proposal in due course.

Rest assured we remain committed to a future one-for-one conversion proposal.

Now, let me pass the call over to Joe to make some final comments.

Thanks, Bob, good morning everyone.

Starting on slide 20, we saw good second-quarter postpaid wireless net additions of 112,000, up over last year and accomplished in spite of intense competition in the quarter.

TELUS's continued focus on high-quality subscriber was evident with our seventh consecutive quarter of year-over-year ARPU growth of 2.4%, driven by strong growth in wireless data.

We continue to generate very robust smartphone adoptions.

Smartphones represented 69% of postpaid gross loading and 85% of retention units.

TELUS's smartphone subscriber base increased 54% year-over-year and now represents 59% of our postpaid base, a 17-point increase from last year.

We continued to see the benefits of network evolution to HSPA, and more recently LTE, with even faster speeds and expanding device options, and the benefits from disciplined acquisition and retention investments.

Although we spent less on retention, TELUS reported an improved blended churn rate of 1.39%.

This is our lowest reported churn rate since the first quarter of 2007, before wireless number portability was introduced in March 2007 and before the arrival of new entrants and new flanker brands.

Low churn reflects the success of our network evolution and the power of TELUS's focus on the customer experience.

Overall we're seeing very positive trends in wireless, with industry-leading metrics including lifetime revenue per customer of more than CAD4300 and COA per gross addition as a percentage of lifetime revenue of 9%.

This reinforces the value creation we are achieving for our shareholders.

Turning to slide 22, we're satisfied with the continued healthy demand that we're seeing for Optik TV and very pleased with the 54% growth in demand for high-speed Internet, with 20,000 net additions in the quarter.

We're also seeing continued positive momentum in the overall economics of Optik TV and Internet.

Particularly noteworthy is increasing ARPU as a large number of TV customers come off introductory pricing and add channels and content to their packages, as well as the impact of rate increases in prior periods.

In June, we increased the price of high-speed Internet by CAD3.00 with the impact to come in future quarters.

The benefits from the pull-through effects of TV and our Future Friendly Home strategy are clearly shown on slide 22.

Combined TV and high-speed Internet net additions of 63,000 once again exceeded residential NAL losses.

This was the eighth consecutive quarter in which we've seen this positive trend, generating ongoing growth in TELUS's overall customer connections.

While improved compared to the first quarter, NAL losses were up year over year.

Although we saw our western cable TV provider competitor back away from some aggressive mass-market pricing promotions from earlier in the year, in May and in June we did see aggressive direct marketing offers including 24-month home phone and Internet promotions.

This was only the second quarter since the launch of Optik TV in June 2010 where we did not see a year-over-year improvement in NAL losses.

However, we are encouraged that our cable competitor appears to have recently discontinued aggressive 24-month promotional offers.

In June that we responded to competitive offers with targeted promotions.

Incremental NAL losses have tended toward lower ARPU price-sensitive clients, the majority of whom have only a single product with TELUS.

This speaks to the critical importance of our bundling strategy.

Almost all TV customers continue to either add or have another service with TELUS.

So, while the heightened competitive intensity in the quarter had an impact on NALs and EBITDA performance, we are still encouraged by healthy second-quarter TV additions as well as the increase in high-speed Internet additions.

At the same time, we will continue to look from for opportunities to enhance average revenue per customer, as well as continue to focus on initiatives aimed at enhancing operating efficiency and effectiveness to mitigate impacts of competition, substitution and increased programming costs.

We remain very excited about the service and the feature roadmap of Optik TV as illustrated on slide 23.

In June we re-architected our theme pack offerings to enhance the viewer experience while at the same time simplifying customer bills.

We also recently upgraded our video-on-demand storefront to add functionality and make it more visually compelling and easier to navigate.

Both of these moves represent potential for future ARPU enhancement.

The recent CRTC arbitration decision was a win for TELUS and reaffirmed our ability to continue offering our customers flexible and innovative programming.

In July we launched Multi-View on Optik TV, an easy to use app allowing Optik customers to watch up to four channels at once on the same screen.

TELUS also launched the Weather Network app on Optik TV, making it easier for customers to check weather conditions and forecasts for any city, or even ski conditions.

Optik has great momentum as we continue to differentiate our premium TV offering with more innovative applications, features and content with more to come.

I will now turn the call back to John.

Thanks, Joe.

Peter, can you please proceed with questions from the queue for Bob, Joe and Darren?

Phillip Huang, UBS Securities.

It's encouraging to see all three incumbents appear to have moved more, I guess, disciplined on the wireless side of the business.

I think we have seen stricter handset operator policies.

We've also seen some symbolic price increases earlier this year.

I'm just wondering how you guys, as you look to more competitive -- seasonally more competitive second half, do you think the industry can maintain such discipline, and especially when the iPhone 5 comes out?

Or do you anticipate that every year around the second half you guys will need to be a little bit more generous?

And also on the price increase, whether you expect to be able to increase on a more broad-based level the way you guys increase prices on the wireline side?

Thanks.

It's Joe.

If you look back over this past quarter we had some intensive competition, and we managed to execute and deliver best in class results.

That intensity, we believe, will continue in the marketplace.

It has been that way for a very long time and will continue to be that way.

I look at our results overall, 112,000 postpaid nets, the churn rate of 1.39, you factor out the Government of Canada losses in there, it's 1.37.

There is a wonderful thing about that sort of churn rate.

It really gives us an opportunity to really step to one side and be more sanguine when it comes to the more aggressive promotions in the marketplace, knowing that the easiest customer to get is the one you already have.

And that has been fundamental to our thesis around our best in class results.

You couple that with the continued support for ARPU growth, especially given the fact that we still have over 40% of our base that has yet to upgrade to a smartphone, there's still opportunity with respect to growing economics.

And the voice to data conversion thesis and economics still make incredible sense for our business.

We're about to enter two very important seasons or cycles.

One is back-to-school and the other is Christmas.

We will see iconic devices come through that period.

But that is the case over the last little while as well.

We launched the Samsung Galaxy S III in the last little while and it has done very well for us.

In fact, from an acquisition point of view the Android devices have been out-loading the iPhone over the previous quarter.

So at the end of the day, without getting into the specifics of our plans for either of those two very important seasons, which are incredibly sensitive, I would say that we are prepared to continue to drive success in the marketplace, leverage the power of our brand, leverage the excellence of the management team and keep driving the sorts of results that you have been seeing.

Thanks very much.

Glen Campbell, BofA Merrill Lynch.

Yes, thanks very much.

My questions are on wireless ARPU trends.

So on the voice side, a very nice improvement in trend and I was wondering if you could give us a bit of color.

Is there less retention discounting?

Is this just a -- is it a change in customer mix?

Or are we seeing some, say, flattening out in demand levels?

And on the data side, could you talk about what is realistic to expect as a penetration smartphones goes from, say, 60% to 90%?

Do you think most of those incremental customers can be brought on at the -- let's say on full data plans?

Or more realistically are we looking at say CAD10 to CAD15 ARPU bumps from those customers?

Thanks.

It's Bob.

I will start off with a reply and then Joe can augment as appropriate.

Personally, I think when one looks at ARPU, really our organization looks at the combination of factors.

Clearly smartphones has driven the ARPU increase in the industry and to a very significant extent at TELUS.

And what has occurred is while ARPUs remain high, they have come down a little bit, but what has been more notable is that churn rates have come down markedly in that category.

So, the loyalty of people who -- their life begins to revolve around the smartphone and the contacts and the connectivity that it provides, and I think that is just a different dynamic than the tradition of conventional voice-centric devices in the past.

The manifestation of that is as we all sort of look at it, lifetime revenues, right -- with a product of ARPU divided by churn.

So, that trend is distinctly positive for the organization and really driven by that smartphone penetration, which for the next few years we would expect to continue to be very significant, as it has been.

In respect to dynamics contributing to the increase in our reported ARPU on a year-over-year basis, I referred to some of those factors in my opening comments.

But suffice to say, data growth that is driving that where there is increased subscription to data plans is coming with smartphone adoption.

And I would add on that, it is less of a factor for ourselves.

But of course it is building out there industrywide, and that is the adoption of tablets, a portion of which have a mobile subscription.

And to the extent that they do, obviously that is a much lower ARPU from a traditional measurement perspective if they don't come with a voice subscription.

But that does lower ARPU.

So I think it is kind of notable then, in terms of 2.4% increase, while tablets are still small, they are an emerging component.

And in spite of that effect on the traditional metric, we're still getting the increase.

The other thing that is probably more TELUS-specific than generic to all carriers is roaming.

And we talked about this in the past, that one of the rationales for the launch of the HSPA network and further through the adoption of LTE is our increased access to international roaming.

So whereas on the CDMA platform it was really a cross-border US Canada dynamic for all intents and purposes, now we've got an international European, Asian traffic component that is really driving that growth as well as -- growth in terms of roaming and overall revenues.

So that is really the primary sort of dynamics, and maybe I will hand over to Joe just to augment.

Thanks, Bob.

The only other thing I would say is if you were able to sit in on one of our management team meetings, you would certainly see a very strong focus on ARPU, but an equally strong focus on AMPU, or average margin per unit.

And we continue to drive efforts across the organization both in wireless and wireline to really drive efficiencies, simplify our rate structure, simplify our ability to serve customers, et cetera, and really take cost out of the organization.

And it manifests itself in the type of EBITDA flow-through that we're seeing on the wireless side right now.

If you look at the last many quarters the flow-through has been significant.

So I think it is fair to say that AMPU is as critical a driving force in the organization as ARPU is.

Okay, thank you.

Simon Flannery, Morgan Stanley.

I wanted to follow up on the comments on the Internet data centers.

You talked about a couple of build-outs there as being part of the CapEx on the wireline side.

Can you just give us a flavor of where you stand in terms of completing those and what is sort of the opportunity they're going to give you once completed?

Thanks.

Sure.

I would be happy to do that.

So, we are in the midst of launching two state-of-the-art, truly best in class on a global basis, Internet data centers.

They are scalable, virtualized and have an ability to expand as our business expands, and have a level of resiliency, redundancy that is truly a top-tier across the globe.

And if you look at our business overall, there is no question that the line between the IT side of our business and the network side of our business is truly blurry.

If you look at applications of all sorts, they are really important to have an ability to host those services within our cloud.

And when I talk about applications, I can talk about -- I ran across a spectrum of applications, whether the application is a hosted service that we're offering our SMB customers, whether that application is a voice over IP service that we are offering consumers.

In the world of LTE, VoLTE or voice over LTE will also be an application that is hosted and managed in a data center, if you will.

So, growth in data center capability is fundamental to the growth and the direction of our business.

The most people to come online in Q3 as Bob mentioned earlier, and we recently announced the Kamloops data center had a groundbreaking ceremony sometime in the June time frame.

Stay tuned in terms of that data center coming online.

It will pay benefit across all segments of our business.

We've been in the managed infrastructure business in the enterprise space for very long time and continue to do very, very well on that front.

So, hosting and managed services there will continue to be part of the portfolio.

In the SMB world, our strategy is predicated on a set of bundled, hosted managed services that really create an SMB capability and a box for our customers and allow them to replicate some of the capabilities they see from very large organizations within a small business context, and allow them to buy those services as they need them, scale them as they need them, without the need for infrastructure within their own premises without the need to manage some of the challenges of having your own IT infrastructure and to adapt as they grow and have seasonal demands.

It is fundamental to our direction of SMB.

On the consumer space we continue to have applications that will reside in these data centers.

In fact, if you step back, you could make the argument that the central office of the future looks more like a data center than a set of switching equipment and gear that sits within a central office.

We have had an IP-based backbone for a very long time and we are driving towards an IP-based converged edge in our network.

And that will continue to play out in the years to come.

And convergence and hosted applications are an important part of our critical future.

Just to add on, Simon, with respect to Joe's comments, just a couple of thoughts.

One is, as you know, telecom providers such as TELUS have very complex and involved IT organizations that have significant data requirements in their own right.

So these world-scale data centers that we're building out enjoy an economy of scale and scope that benefits from hosting both our internal as well as external client data.

And as perhaps the leading provider of security consulting and advisory services (technical difficulty) in fact that we provide it to security firms and software firms on a global basis.

Security and privacy are utmost issues of focus, concern and expertise for our organization and that bodes quite well for a go to market, given the increased in with respect to that in the world of the cloud.

The other thing I would mention it is clearly where we're following a slightly different strategy than some other organizations.

And it is not that there is only one strategy to follow here, but in terms of our organization, we are focused on a managed solution approach as opposed to co-location.

That's consistent with the types of margins and integration of service offering that we're looking to bring to market.

And in that respect, in the optimal approach to this is for us to be building organically, from the ground up, state-of-the-art facilities where their locations, their power, their efficiency, their security -- everything about them is best in class.

And in that respect it is a far superior approach for our organization than it would be say to acquire an existing data center operator who has a diverse topology, a go to market strategy that is contrary to that which our organization is following, with all of the associated post-merger integration issues that that brings to bear.

So, we think we're following the right strategy.

It is an organic one.

It does require some CapEx, and that would be substituted if you will for the investment line for some other organization.

We feel this is the right approach and we're very, very excited.

The last thing I mentioned you may not be familiar with, but with Patriot Act and other considerations, quite a number of our domestic clients, including linkages to the health vertical which we are so well focused on, have domestic hosting requirements or criterion.

And so we're very well-positioned as one of Canada's -- if not the leading, certainly one of the top two or three data center providers.

And so this is a position we're now going to be able to build upon with the new capacity and capabilities we're bringing to market.

You know, as an investor, bear in mind that we get to leverage the economies of scope and scale between our internal needs for hosted applications and the data centers, and also leverage that with our go to market capabilities.

So we really do get that synergy.

And like I say, with Kamloops we have an anchor customer already in BC Hydro and that will give us a great starting point in terms of watching the economics of that investment.

Great, that is very helpful.

Thank you.

You're not allowed a follow-up on that one, Simon.

We did it for you, Simon.

Dvai Ghose, Canaccord Genuity.

Thanks very much.

Good morning.

You are clearly still showing very strong momentum on the ADSL and TV side which require significant investment, but your margins on the wireline side have slipped below 30%.

I think they're 29% in the quarter, which is very much in line with your wireline CapEx to sales, so all the cash burden is currently falling on wireless.

I wonder if you could remind us of the key drivers, both margin as well as CapEx, when it comes to free cash flow recovery in wireline and what do you think the timetable will be.

Okay, I'll kick that off.

Related to our internal budget and where we hope to be for this quarter, we had a disappointing development in the second quarter.

It had been part of our plan for this year to make price increases on those product lines you referenced in the May timeframe.

But given our primary competitor had reverted to an aggressive posture in the May timeframe, it was not really possible for us to go ahead with the plans that we had at that time with respect to the price increases.

So we were matching the competitive offers in the marketplace.

Now, we had yet another oscillation in competitive behavior such that the window of opportunity opened for us to go forward with the price increases that we had budgeted.

So they were announced in June, will really flow starting -- flowing through various billing cycles of commencing in the month of July.

So we will start to see that in the second half of the year, but we are hoping to get that in the second quarter.

So there is an example, right, that you can never control competitive behaviors.

It's the nature of a competitive marketplace, but certainly disappointing that just at the point you're about to increase pricing, your competitor really goes aggressive and so you have to defer something.

So we'll see how that plays out.

But that bodes some more optimism, obviously, in terms of some margin in that area in the second half of the year.

We've talked a fair bit about it TV in the past in terms of its ramping up in quarter over quarter.

We have improved EBITDA contribution from that service and we look forward to continuing with that in the back half of the year, and ultimately crossing the breakeven in the second half of 2013.

In terms of other areas, the SMB space there is significant competitive activity there again from cable competitor and otherwise as that re-price goes through the P&L.

Enterprise is doing well in terms of margin improvement there.

But at the end of the day, I think the reality is we're dealing with some growth areas but we're also dealing with some challenging segments.

So the focus on operational efficiency needs to be a constant in this organization.

And that is why back last quarter we talked about increasing the restructuring reserve for the year by doubling it to CAD50 million.

And we have a full pipeline of initiatives to use up that CAD50 million estimated amount for this year, so we continue to drive on that side.

So it is the combination of continued momentum, the growth services, the price increases coming through although on a deferred basis, as mentioned, as some uncontrollable factors which relates to the competitive side as well as the focus on the operating efficiency.

And the last thing I will say, as I alluded to in my comments, that the year-over-year type of comparison we always do in MD&A and the [analyst] -- it's a little bit more difficult on the wireline this year, because we do have a number of one-time items, which we have commented on in our MD&A and I alluded to my comments earlier.

And we can certainly walk people through off-line.

But at the end of the day, they're both positive and negative.

But if you exclude the TELUS Garden revenue impact on the expense line, there is about CAD10 million net of increased cost sitting in that side of the business that need to be normalized for, so we can walk people through that.

That's great.

If I could ask you a quick follow-up, the CapEx guidance increase -- is that driven by accelerated LTE on the wireless side?

Or is it on the wireline side or a combination?

It is primarily on the LTE side.

Essentially it is not that we're now going to do more than we wanted to do originally.

It is that we are faster in the deployment of cell sites than we had planned to be.

We're basically right on plan, whereas we typically take cushion for some operational constraints that typically arise.

We are bit ahead of the game in deployment, therefore at the capital deployed is ahead.

So, one could slow down in the back of the year, but really, given this was a multiyear project, we're going to continue to plow ahead.

And consequently it is going to be more deployed in calendar year 2012 than we originally were expecting.

That drives the bulk of the increase.

Having said that, there is a much smaller element of the increase given that we now have our second Internet data center now under construction.

So, while the Rimouski one will come online in Q3, the Kamloops data center -- which is a 2013 timing for going live commercially -- is now under construction as well.

So we've really got a double-barreled effect at the moment and continue to build in respect of Kamloops in the back half of the year.

And that is a minor component of the increase overall.

Just a couple of thoughts on wireline EBITDA performance.

As we grow the base, and as we kind of approach [CAD700,000 in the base] by the end of this particular year, we will start to get some of the economies of scale in our TV business.

Not only will we get the impact of less dilution from new customers on promotion versus the tenured customers who are coming off promotion, we will couple that with a lot of progressive marketing that we're doing on the VOD take-up and ARPU enhancement front.

Year-over-year for our double and triple play Optik TV customers, we have seen a lift in ARPU as high as 8%.

We think there is opportunity on that front to keep driving and growing that capability.

You couple that with some of the operational efficiency comments that Bob alluded to, we have a whole host of initiatives aimed at taking cost out of the organization.

Some things as simple as clarifying and simplifying the TV bill so that it drives less calls into our call center is an example.

Some of the consolidation in real estate will take a lot of the operating costs in different buildings across TELUS as we consolidate real estate and move to more of a mobile set of workers.

We've got a whole set of activities looking at improving efficiency in the channel.

So, between the topline and bottom-line actions, we've got a number of initiatives that are squarely focused on that point.

Okay, next question please.

Greg MacDonald, Macquarie Capital.

Good morning.

First let me say if your call has to fall on a pre-long weekend Friday, I think I speak for most analysts in thanking you for starting it at 6 AM Vancouver time.

So, thanks for that.

Quick question on wireless, actually related questions on wireless.

I'm going to assume this quarter was predominantly an Android quarter for gross adds.

So, first question, could you or would you describe the iPhone activity in the quarter, specifically potential for delayed purchases in the second Q and third Q, waiting for the iPhone 5 versus last year's activity?

I assume a lot waited for the 4S.

Then could you also with 59% penetration -- smartphone penetration on the postpaid base, would you describe the mix of replacement or upgrades versus new subs for iPhones?

I mean, I don't know if you will give me a percentage, but can you confirm that the majority are now a replacement for the iPhone activity?

Okay, Greg.

It's Joe.

A couple thoughts.

I made a comment earlier that Android devices did very well on the acquisition front through the quarter.

No question some of the new devices helped to lift the Samsung focus in the marketplace.

But Apple did very, very well in the quarter.

We have seen strong focus in acquisition on the iPhone.

On the retention side, iPhone led retention units and Android was second from that point of view.

And Blackberry continues to have a meaningful component of our business from a retention point of view in the business space, certainly a significant or material impact on the loading front.

We are not seeing any current signs of delayed purchasing in advance of an iPhone 5 in the market place, and I will leave it at that.

If you look around our stores, the excitement around the iPhone is still there and the focus is still there overall.

In terms of talking about what percentage of what percentage of iPhone sales are acquisition versus retention, we're not going to disclose that ratio of that mix.

Suffice it to say that we have a very heavy material focus on retention.

We -- given the nature of our distribution, the power of the TELUS brand, the attraction we have in the marketplace, we're seeing a lot of customers port their phone number or port their capabilities over to TELUS and come and get an iPhone from us.

So we're certainly seeing that activity in our porting results.

That's great, and just to add on to Joe, we are a little sensitive just because of competitive information on this topic.

But I think what we can say is that the iPhones led in terms of volume of loads, whether it be new acquisition or retention.

So Androids did exceedingly well, but were the number two category.

So the more -- of course Blackberry being a more tougher experience in the quarter.

So iPhones being number one, whether it is new or retained units, that is a very strong position.

And clearly we are excited about the opportunities associated with the iPhone 5 when it comes, as we all hope in the second half of the year.

Next question please, Peter.

Vince Valentini, TD Securities.

Yes, thanks very much.

I apologize you have not had much time to think about this, but I wanted to give you a question to give you an opportunity to try to clarify something.

On Mason's request last night, there are some people who are -- they're looking at 2005.

There were some votes where only the voting shareholders got to vote on changes to the articles.

So just wondering how confident you are that this is absolutely something that would get -- both classes of shares get to vote on it versus just the voters?

What are you referring to, Vince?

Amendments to Article 12.1 of the articles where -- said the Board members at 12 to 16 in 2005, and there was removal of pre-existing conditions provisions.

I don't have all the details in front of me, but there were several things that were voted on then.

And the nonvoting shareholders got to vote on two things, which was changing the resolution threshold from 75% to 66%, and the restrictions related to the Radio Communications Act and the Broadcasting Act.

So it seemed to be a bit all over the map in the past as to which files they get to vote on, which they don't.

So I'm wondering, in your mind, is this is categorically something that they get a vote on in your minds?

Well, I must say your expertise in corporate law supersedes mine.

I don't even know what those clauses that you are referring to.

But suffice to say in general, if you are amending the articles that relate to the rights of shares, then those shares get a vote.

And that, to my knowledge, has been the case in all cases in the past with TELUS and would be in the future.

Consequently, if there is a proposal where you are affecting the articles of our shares, then the non-voters would be voting and the voters would be voting.

And that is why we have always said the nomenclature for non-voting is a misnomer.

We really didn't want to call them nonvoting.

In fact the Toronto Stock Exchange a few years ago actually told us to change the name to -- with the subordinate voting shares, if I recall, and then changed the policy because they did want to have confusing symbols.

They went back to non-voting.

So the in the market, in its inefficiency (technical difficulty) and we increased the discount again even though nothing had changed with respect to the rates of shares, just how they were being referred to in the ticker symbol.

So at the end of the day, we are committed to the best in corporate governance and the complete opposite to the hedge funds that's try to make money by extorting our shares.

I might add, they might have made a lot of money if they had gone long in their shares.

It's unfortunate they shorted their shares in the past four months.

But in any event, they did, and so they are stuck.

And we will be coming in due course with our proposal on a one-for-one basis.

I think that is the key point for everyone to keep in mind.

Peter, if we could have the last question, please, we're just slightly through nine so we will take one more question.

Peter Rhamey, BMO Capital Markets.

Great, thanks for fitting me in.

A question for Joe -- or Bob, actually.

On the LCD side you mentioned your build as slightly ahead of expectations, and hence the revision to CapEx guidance.

Can we look at that as a pull forward from 2013 in terms of how to look and model the Company?

And I was wondering if Joe perhaps could comment on data growth in the LTE network and uptake there, how that's tracking relative to expectations.

And the follow-up question to that would be just on the cost and programming side.

Is there an opportunity, now that you are approaching 600,000 customers, when you look at your content agreements, Bob, to increase margin through lower programming costs because of your scale?

Thank you.

Okay, let's see.

The first one was with respect to whether the increased LTE would be a pull forward.

Certainly that would be an appropriate description in terms of the rate at which we're deploying LTE.

But in terms of therefore reading through as to what our CapEx may or may not be in 2013, I just want to caution people we have not set our budgets with respect to next year.

Whether or not we do other things or what have you has not been decided upon yet in the organization.

So I don't want to take the read through that LTE therefore means overall CapEx is changing by the same amount.

We'll come back in the late fall in terms of providing guidance for next year, as we typically do.

So, that is I think the appropriate response to that question.

In terms of programming costs, there is to a certain extent scaling opportunity with respect to that.

We are now crossing the 600,000 subscriber level.

But at the same time, there is some inflation in programming costs I think we would all be generally familiar with, and to that extent, there is a bit of an offsetting factor in that regard.

So I wouldn't say that there is a dramatic reduction in the per-unit programming costs over the next 12 months.

And on LTE, Peter, I think it is fair to say that sales of LTE devices really have been moderate compared to HSPA devices, although they are ticking up.

I mentioned the Galaxy S III, which has been a very successful launch for us and really driven a lot of volume in LTE devices.

We've got a good lineup in terms of handsets.

The S III, as I mentioned; the Galaxy Note, the LG Optimus, plus Internet Key, the Galaxy Tab, so there are a number of devices.

But this will be a handset-driven ramp more than anything else.

And as we get the next round of iconic devices coming through the market place, we would get an even further increase in LTE adoption.

We launched the network in February with service in 14 metropolitan areas.

We will continue to expand coverage.

We now have more than half of the Canadian population covered, and we expect to be at roughly two-thirds of the population of pops covered by year-end.

And then as the 700 megahertz rules get solidified and we have the auction, et cetera, then we will start expanding on a rural front as well.

But stay tuned in LTE adoption as new devices come out.

Great, thank you both.

Well, I will call the call to an end at this point.

Thank you all for taking the time to join us today, and we obviously continue to appreciate your interest and continued support of TELUS.

Please enjoy your long weekend and also hopefully some August vacation time.

Ladies and gentlemen, this concludes the TELUS 2012 Q2 earnings conference call.

Thank you for your participation and have a nice day.